Life Insurance

Why are commercial insurance prices rising?

Aon’s report finds that pricing momentum is expected to continue worldwide through 2021, although the approximately US$20 billion of capital that entered the market globally between March and December 2020 could potentially serve to temper any dramatic rate movements.  

“Pricing in commercial markets continues to rise,” said Stephene Ashikwe (pictured), senior vice president, Aon Global Risk Consulting. “Insurers are withdrawing capacity from key lines of business and geographies worldwide. They’re also tightening up their policy terms and conditions, and the general underwriting process is a lot more rigorous than it ever was before. Pricing was already rising before COVID-19, but the pandemic has exacerbated some pre-existing trends. As a result, we’ve seen both clients and insurers put in place some rigorous controls, and there’s been a lot of revisions to risk appetite and strategy.”

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The pricing momentum identified in Aon’s Q4 2020 Global Market Insights Report is the conclusion of a longer story, according to Ashikwe. For several years, property & casualty (P&C) insurers worldwide have been investing in core system modernization and enhanced capabilities around data & analytics, digitalization, and artificial intelligence (AI), in order to more accurately price risk and determine appropriate market capacity.

Insurers are de-risking their portfolios and re-tooling to incorporate data & analytics, which has resulted in more rigorous and technically focused underwriting. At the same time, insureds have grown to expect more customization and flexibility in risk transfer, and enterprise risk management has reached new levels of complexity and sophistication. All of these changes have impacted pricing in the commercial market.

What does this mean for brokers?

Insurance brokers must keep up with technical developments in the industry, Ashikwe stressed, not only in terms of risk transfer solutions and products, but also around actuarial science, data & analytics, and how they understand and explain risk-based technical pricing.

Read next: Insureds in niche industries struggle in ‘challenging’ hard market

“In the hardening market, clients and brokers are increasingly using actuarial science to shore up submissions and find better ways to negotiate coverage terms and conditions,” Ashikwe told Insurance Business. “In the past, actuarial science was only really used by insurers for risk-based technical pricing, but now brokers are using it to encourage underwriters to place their business. This market has created somewhat of a team atmosphere between the underwriter, the broker and the client in the sense that clients are actually giving a lot more information to their brokers, and they’re doing that a lot sooner, which is helping brokers to send stronger submissions to the market.”

With pricing momentum set to continue, Ashikwe also expects to see further interest and growth in alternative risk transfer (ART) solutions, such as: sustainable balance sheet funding, special purpose reinsurance vehicles, reciprocal risk retention groups, and single-parent or group captive solutions. Commercial interest in ART has grown amid the COVID-19 pandemic. This trend is unsurprising, given how companies are being forced to retain more risk on their balance sheets at a time when the global economy is strained after 12 months of reduced activity.

While the global economy is recovering and unemployment rates are improving, Ashikwe urges “cautious optimism”. He said: “Insurance organizations are going to be really careful in how they manage their balance sheets through [the COVID recovery period]. Having an excess of capital doesn’t necessarily mean we can cover every risk that comes our way. COVID-19 is a prime example of that – many weren’t ready for such a risk to impact us at this level. While companies are re-shaping themselves, I think it’s important to understand it’s all about managing balance sheets better than we’ve done in the past.”     

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